Michael Noonan (Limerick City, Fine Gael)

The Government last week published the report of the interdepartmental group on mortgage arrears. The group was requested by the economic management council to examine the further necessary actions that could be taken to address the increasing problem of mortgage over-indebtedness. The Government is aware of the increasing stress that some households are facing arising from difficulties in meeting their mortgage commitments and felt it was timely to ascertain what additional measures could be introduced to assist people dealing with such difficulties.

The group was chaired by Mr. Declan Keane, an accountant who was on secondment to my Department from KPMG. Officials from my Department, the Departments of the Environment, Community and Local Government, Social Protection, Justice and Equality, and Public Expenditure and Reform were on the group. The Central Bank of Ireland was also represented and the group included some industry expertise from the banking sector.

The principle of a fresh start for people facing difficulty in dealing with their mortgage commitments is a key priority for the Government. The approaches set out in the report will give people a fresh start and allow them to break the shackles of unsustainable debt, which can have such a destructive effect on family life.

When the economic management council requested work to be carried out in this area, two core objectives were set for the group. First, there was a desire to ensure that mortgage holders who are experiencing real difficulty should, where appropriate, be assisted in remaining in their own homes. Second, any framework and range of supports for mortgage holders must be able to distinguish between those who cannot afford to pay their mortgage on their primary home and those who choose not to pay their mortgage.

As a Government and society we must be open and willing to assist the first group in an appropriate way. However, where people are able to meet commitments they entered into, it should not be for society as a whole to offer benefits or gains to such groups at the expense of others who may have a greater need. This is even more relevant against the background of the severe fiscal circumstances that the country now faces.

The early reform of the personal insolvency legislation will be a central element in the majority of the resolution mechanisms proposed in the report. It will act as the catalyst for change in the relationship between the borrower and the lender. This report offers a range of solutions, which take account of the very different circumstances of each borrower and the difficulties they face.

The range of solutions includes: split mortgages which would allow borrowers to recalibrate the mortgage payment to a more sustainable level. This enables mortgage holders to reduce their weekly payments at the present time. When their circumstances improve, they can then increase their repayments. Trade down mortgages and sale by agreement mortgages offer solutions in other circumstances. These approaches allow families to move to homes more suited to their current needs; whether it is to obtain employment or to move to a more appropriately sized home for their family. Only where the mortgage is unsustainable would the mortgage to rent schemes become options. These schemes would allow people to stay in their homes albeit within the context of the social housing network. It would lift the crushing psychological burden of unsustainable debt, which can weigh on a family forever.

We all agree that the resolution of mortgage is complex and the decisions to be made by individuals should not be taken lightly. The report advocates the creation of an independent mortgage advice service to guide borrowers through the range of options open to them. This independent mortgage advice service will help ensure that the borrower selects the best option for him or her.

The key overall finding of the working group was not surprising and reflects the general finding of previous groups. That is, that there is no magic bullet or solution to address the problem of mortgage difficulty. Any attempt to address this problem in a global way would be very costly and will not offer sufficient real assistance to those people most in need of support.

There has been some commentary that clearing the negative equity of mortgages would resolve the difficulties in the mortgage market. The Central Bank has estimated that this option would cost approximately €14 billion. Such an approach would not address the key difficulty of making the mortgage payments affordable, which is essential to solving the difficulties experienced by people in arrears.

The main cause of mortgage holders going into arrears is that the household experiences an income shock, such as that which arises from a loss of employment, and not from negative equity at a particular point of time. While it is accepted that negative equity causes significant concerns for indebted households and that it can have a negative impact upon consumer and wider economic sentiment, it does not of itself cause people to go into mortgage arrears or experience affordability problems. The Central Bank estimates that only 10% to 13% of households in negative equity are also in arrears. Blanket approaches to deal with the problem of mortgage arrears by writing off debt would, therefore, be a costly and inappropriate public response to the problem of mortgage arrears.

The issue of mortgage difficulty can only be addressed in an effective way on a case-by-case basis. The circumstances of each household are different and each household will need to be treated having regard to its individual circumstances. The level of income, the size of the outstanding mortgage and other particular requirements or demands on the household will all have to be considered. The option that will be most appropriate for the particular household can only be considered when all of these factors are taken into account. This case-by-case approach, therefore, is the only appropriate way to deal with such a multifaceted problem.

Underpinning any proposed solution, will be the need to modernise our bankruptcy and personal insolvency law. The current legislative resolution framework for personal insolvency, the Bankruptcy Act, is antiquated and does not meet the requirements of the modern credit market. Accordingly, it is necessary to put in place a more modern framework, one that will not unduly penalise people who can no longer, through no fault of their own, meet their current debt commitments. It will be very important for people to have a realistic option of selecting bankruptcy as a means of debt settlement where the burden is just too great. The Minister for Justice and Equality, Deputy Shatter, will shortly introduce proposals for this important reform of the personal insolvency legislation. It should be recognised that while the Government will bring forward this legislation speedily it is by no means envisaged that it should or will become the debt-resolution option of choice for a significant number of mortgage holders. There is an onus on the banks to recognise the economic fact that bankruptcy settlement will often not be in the interest of any of the parties and that alternative solutions such as those advanced in the report and others need to be developed.

Another important recommendation is the proposed support and advice for distressed mortgage holders. This is a very complex and stressful situation. The solutions proposed in the report and any others that may be provided by mortgage lenders together with the proposed significant reform of personal insolvency law will create new options that will have to be evaluated and carefully considered by people with distressed mortgages. Many of those affected may need specialist advice and assistance to guide them. MABS currently provides an important service, but the type and scale of the demands that now arise in the case of mortgage debt are of a different nature from the financial issues MABS was initially established to assist. Specialist financial, legal and accounting expertise will be required for the growing problem of mortgage and related debt. Also, the structure of the existing MABS service, based on more than 50 independent companies throughout the country, militates against the provision of such a specialised service. The report, therefore, suggests that a more centralised and specialised service should be provided that could nevertheless link into MABS and take referrals from the existing MABS service. To an extent this would mirror the approach already adopted by the banks, which operate a more centralised service in their dealings with people with problem mortgages and would allow for a more informed view of the actual approach that banks are taking in their dealing with mortgages in difficulty. The report proposes that the banks should fund this service and this is a view I would endorse.

The group found that existing forbearance approaches are a very worthwhile and appropriate response to most people experiencing mortgage difficulty. The key factor for mortgage sustainability is long-term affordability. Unfortunately, some people will experience temporary affordability difficulties arising from, for example, a loss of employment, but if they can secure alternative employment in the future they may be able to overcome such a temporary difficulty. In such cases, the forbearance approaches as set out in the code of conduct on mortgage arrears such as extending the term of the mortgage, reduced payments, interest only payments and the deferred interest scheme are all appropriate for consideration having regard to the individual circumstances of each case. The Department of Social Protection mortgage interest supplement also makes an important contribution for eligible households. Therefore, this forbearance approach allows a household experiencing temporary mortgage difficulty important breathing space to enable that household to get back on their feet and resume meeting their full mortgage commitments at a future time.

However, the group also recognised that, unfortunately, there are some mortgages that, even with the best will of all concerned, will not be sustainable on a long-term basis. Where there is little prospect of people ever being in a position to build up reasonable equity in their mortgage, the appropriateness of forbearance measures in such circumstances will need to be considered. In this context, consideration will also need to be given to the current unlimited duration of the mortgage interest supplement scheme. This scheme, which provides an income supplement to an eligible household that will meet most of the mortgage interest payments, can allow both the borrower and the mortgage lender maintain the status quo for an extended period of time. However, if the only reason a mortgage can be sustained on an extended basis is the fact that the Exchequer pays the bulk of the interest payments, then it has to be recognised and accepted that this is not in the long-term interests of the taxpayer or the other parties. Other more sustainable approaches will need to be considered.

The report outlines a so-called decision tree approach to assessment and suggests a range of solutions that may be appropriate. These include the following. Trade down mortgages could be suitable where the owner of a higher value or larger property trades down to a lower value house and will consequently have a more affordable mortgage. Given housing market developments, it may be possible for a person to trade down to a larger home. Split mortgages could be suitable where a household is not currently in a position to meet the commitments of the full mortgage but could meet the commitments on a reduced amount and perhaps repay the remainder overtime from income or capital increases. Sale by agreement could apply if an alternative solution cannot be reached and the borrower and lender agree to sell the property and resolve the shortfall in the mortgage in an appropriate and reasonable manner, after the sale taking account of the borrower's circumstances. Mortgage to rent would be suitable where the borrower and their home is social housing eligible.

The report also makes clear that these solutions are not intended to be exhaustive or prescriptive. Other solutions can and must be developed by mortgage lenders to address individual cases. My Department will seek to advance this in its contacts with the banks.

The State has a responsibility to provide housing to those whose resources can no longer allow them to pay for housing. For example, many people in receipt of mortgage interest supplement on a long-term basis are likely to have an eligibility for social housing support. Recent information shows that the number of households in need of housing support has increased and there is, therefore, a need to boost the stock of available social housing in the State.

The mortgage to rent schemes allow the State to directly increase the number of social housing units and provide it directly to those in need. Two options are presented for development within the mortgage to rent scheme. The first envisages the involvement of appropriate Department of the Environment, Community and Local Government approved housing bodies, and the second will involve mortgage lenders entering into long-term leases with housing authorities. In each case, the borrower and the lender, as part of the MARP process, reach an agreement that the mortgage is not sustainable on a long term basis. Where the person would qualify for social housing support if the house was repossessed and the person's home is deemed suitable for social housing purposes, which in both instances will be decided by the local housing authority, then the possibility of utilising one of these proposed mortgage to rent schemes arises. The primary advantage of such a scheme is that the person stays in their home and their family remains in the local community of which they are part. It also ensures that the social housing list is not unnecessarily extended. The conversion of the home to social housing is done in a confidential manner so there is no social stigma attached. I should clearly say that there should never be stigma attached to a citizen of this State seeking assistance in their time of need, but unfortunately this is not always the case. It is proposed to launch these schemes on a pilot basis initially, and the Minister of State, Deputy Penrose, will outline greater details on these schemes in due course.

The challenges facing mortgage holders and society at large since the inception of the banking and economic crisis are significant. Nevertheless, we have already taken significant and essential steps to overcome them. The challenge for the Government is to manage and lead that process at a time when the resources are limited and the options are constrained.

All of us recognise that this problem is complex. Neither the work of the group nor this report, were designed to offer the complete solution to the mortgage arrears problem. As is recommended in the report, further solutions need to be developed by the mortgage lenders and these need to be assessed by the Central Bank. The report sets out some very important recommendations on where the State should play its part by supporting mortgage to rent schemes, establishing a mortgage advisory function and introducing more appropriate bankruptcy legislation. It also sets out a clear framework for assessing individual situations and a range of suggested solutions.

Others, in this House and outside, may also have other important contributions to make. I look forward to Deputies on all sides contributing to this very important debate and will consider all helpful and practical suggestions to tackle the problem of mortgage distress, both in my closing response and in the ongoing consideration by the Government of this important issue.

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